A family trust can be a powerful tool for protecting assets, minimising taxes, and securing long-term financial stability for your family. But is it the right structure for your situation? Setting up a family trust requires careful planning to ensure it aligns with your financial goals, business interests, and legal obligations.
At Liston Newton Advisory, we’ve spent decades helping small business owners and investors establish and manage trusts that provide real financial advantages. In this guide, we break down the pros and cons of family trusts, the tax benefits, and the steps involved in setting one up so you can make an informed decision with confidence.
[general_awards][/general_awards]
What is a family trust account?
A family trust is a discretionary fund that holds valuable family assets and distributes income to its beneficiaries.
In Australia, family trusts are established by trustees: in this instance, parents. The trustees can fill their family trust with profit from their family business, and the trust will then distribute that income to its beneficiaries; they’re often set up to benefit the children, grandchildren and spouses of the trustees. The trustees determine the value of the distribution each beneficiary receives.
[tip_box]
Setting up a trust for a child
If you're looking to secure your child's financial future, setting up a trust can be a smart way to protect assets until they reach a certain age. When we set up a trust for a child, we typically use a discretionary or testamentary trust, which allows us to manage funds, distribute income, and safeguard wealth for their benefit. You'll need a legal trust deed, a trustee to oversee decisions, and named beneficiaries — your child or children. In most cases, income earned by the trust is taxed at adult rates to avoid high penalty taxes on minors. With the right planning and guidance, you can create a structure that supports your child's financial future while staying compliant with tax regulations.
[/tip_box]
How a family trust works
A family trust works by reducing your business’s tax obligation to the ATO.
Much like a company structure, a family trust prepares a set of annual financials and lodges a regular trust tax return.
- Profit is calculated at the end of the financial year (income minus expenses plus the previous year’s losses) and then distributed to the beneficiaries.
- Distributions received from a trust form part of the beneficiary's assessable income. If the beneficiary receives income from other sources, all their income is taxed together.
The trust doesn’t pay tax, so beneficiaries are taxed on the amount of income placed in their name. If the business being run via the trust generates more than $75,000 of income in a financial year, then the trust is required to register for GST.
Why establish a family trust?
The primary purpose of a family trust account is to protect your income by reducing your tax obligations. Many family business owners choose to structure their business under a family trust to minimise tax liabilities and protect assets from financial risks.
There are three key reasons why you should set up a family trust:
- Your family business is growing
- You have new business opportunities
- You need to structure your investments properly
An example of why you should set up a family trust
If you operated as a sole trader and earned $200,000 in a year, you would be obligated to pay approximately $65,000 in tax.
Instead, you could place your profits within a family trust to lower your tax obligation. Then, you can have the trust distribute a portion of the profits to you and the other beneficiaries.
Except in certain specific circumstances, the trust does not pay tax. Rather, the beneficiaries are taxed at their personal tax rates, which are likely lower than the corporate tax rate you would have otherwise paid.
In this example, if each beneficiary receives $66,600 from the trust, the combined total tax owed would be around $40,000.
In the end, your family trust has saved you $27,000.
When should you set up a family trust?
The best time to set up a family trust is if you run a family business and:
- Profits are growing
- The business is expanding
- Your average tax rate is approaching 30%
In these instances, a family trust can help reduce your tax rate. A family trust can also act as a holding structure if you're making significant investments. A trust can protect those assets from financial and legal troubles and save you taxes along the way. However, entering into a family trust isn’t a simple decision. It requires careful thinking and planning for the future of your business and investments.
Let’s look at the pros and cons of a family trust in detail.
Family trust advantages and disadvantages
Advantages of having a family trust
Family trusts make your business tax-effective
Trust income and capital gains can be distributed across a family group in proportions that best suit each individual's tax rates. This means setting up a family trust allows a trustee to avoid the company capital gains tax rate, and instead distribute profit from a business in a way that effectively minimises taxes.
When the profit of a business gets too large to distribute effectively, a family trust can also distribute to a separate company to cap the tax rate at 30 per cent.
[feature_link]Keen to learn more about that ‘separate company’? Let’s talk about how to use a bucket company to minimise your taxes.[/feature_link]
Family trusts make your investments tax effective
A family trust is a tax-effective structure to hold investments, as the dividend income received can be distributed across the family in a way that best minimises tax. If trust assets are sold after 12 months, the trust can receive a capital gains concession, and the capital gain income can be distributed among family members.
Family trusts protect your business assets
If you run a business from a family trust, you can set up a company to act as the trustee. The trustee company gives you access to the limited liability advantages of a company structure and gains you the tax flexibility advantages of a family trust.
Family trusts protect your investment assets
If there are significant investment assets involved in your business, a family trust can offer secure protection for them, as these assets won’t be held in your personal name. Your trust is a separate legal entity, meaning you can access a certain level of protection if you face financial difficulty or legal action.
The trust can hold various assets, including investments, business income or shares, and even the family home if structured correctly. However, holding a personal residence in a trust may have tax implications, so professional advice is essential.
Disadvantages of family trusts
Family trusts only distribute income to your lineal family
One of the main disadvantages of a family trust is that you can’t add people outside your family, and you can’t add additional shareholders. Therefore, if you plan to run your business from a family trust and desire to grow your business beyond your family in the future, then a family trust may be a significant disadvantage.
Family trusts do not scale well
If your business truly takes off and profits begin to exceed $500,000 per annum, the tax planning of a family trust becomes increasingly difficult. In this case, a company becomes a better solution.
Family trusts cannot access government grants
A family trust can flexibly access funds, though it’s quite limited in other ways. Operating a family trust means you likely can't access many government grants and tax concessions, such as the Research and Development tax concession or the Early Stage Investor concessions.
Family trusts require ongoing maintenance
To keep the trust in good standing, ongoing tax compliance is required, including financial reporting, tax filings, and ensuring distributions align with the trust deed. These costs start at $1,500, plus GST, for very simple holding trusts. The amount increases as the trust becomes more complex.
A family trust is not indefinite
The trust must be wound up at a specific time, known as trust vesting. In Australia, trusts typically have a maximum lifespan of 80 years, after which assets must be distributed to beneficiaries.
[feature_link]What about the taxes? Not to worry — we go into detail about how family trusts are taxed in Australia.[/feature_link]
How much does it cost to set up a family trust?
In Australia, the cost of establishing a family trust is relatively low. A family trust generally costs $1,500 (plus GST) in legal documentation to set up, or $2,500 (plus GST) for a trust with a corporate trustee.
Australia enjoys a relatively low cost for establishing a family trust. However, there are no hard and fast rules about what the family trust setup process can cost. It can vary based on the complexity of your assets and financial goals, but it’s worth considering the long-term tax benefits and asset protection it provides.
How to set up a family trust in 9 steps
This quick list serves as a comprehensive guide to set up a family trust, outlining the necessary steps to establish a trust structure that suits your financial and legal requirements.
Here's how to successfully set up a family trust in Australia.
1) Determine the type of trust you need
Before setting up your family trust, you’ll need to decide on the type of trust that best suits your financial goals. The most common choice is a discretionary trust, which allows flexible income distribution to beneficiaries. However, a unit trust may be preferable if fixed entitlements are required.
2) Determine your fund's trustee(s)
The trustee of your family trust has an important role, as they have the ultimate power over who receives money from the trust. Typically, you would nominate yourself as trustee, or have a corporate trustee with yourself acting as company director.
In some rare instances, you may decide to choose a third party to act as your trustee.
In this case, you can choose either:
- A family member
- A professional individual, such as a financial adviser or lawyer
However, they don't necessarily need to be related to your family. In some circumstances, it's best that they not be to provide an objective view.
3) Identify your beneficiaries
Typically, a beneficiary of your family trust can only come from within your family unit. As a beneficiary, the trust deed states the extent to which they're entitled to income from the trust.
In the case of a discretionary trust (or family trust), you can set these entitlement percentages as you see fit. For a unit (or fixed) trust, these percentages are set out within the trust deed.
4) Create the trust deed
A trust needs a legally binding deed to become active. The trust deed outlines all legal arrangements, including the responsibilities of the trustee, the beneficiaries, and the details of trust property, which refers to the assets held within the trust, such as business profits, investments, or real estate.
5) Settling the family trust
Once the trust deed is drafted, it needs to be settled. This is done by the appointed settlor, typically an individual unrelated to the family.
To establish your trust, the settlor must contribute a nominal amount (e.g., $10) to formally bring the trust into existence.
6) Signing the trust
Once the trust is signed, the trustee(s) hold a meeting to formally agree on their appointment to the position. This binds them to the terms and responsibilities of the family trust deed. Once that’s done, it's set as the legal framework that governs how the trust operates.
7) Stamp duty
How you pay stamp duty on your family trust will vary between Australia's states and territories. Some states require the family trust to be stamped by the relevant revenue authority (such as the State Revenue Office.)
- VIC: $200 stamp duty, due within 30 days of execution of the deed. No charge for additional copies.
- NSW: $882 stamp duty, due within 3 months of execution of the deed. $10 charge for each additional stamped copy.
- ACT: Stamp duty is not payable, and no time limit is imposed.
- QLD: Stamp duty is not payable, and no time limit is imposed.
- SA: Stamp duty is not payable, and no time limit is imposed. Deeds may still be considered ‘exempt’ in some circumstances.
- WA: Stamp duty is not payable, and no time limit is imposed.
- NT: $20 stamp duty, due within 60 days of execution of the deed. Each additional stamped copy costs $5.
- TAS: $50 stamp duty, due within 90 days of execution of the deed. There is no charge for additional copies.
8) Applying for an ABN and TFN
An ABN and TFN must be lodged for the trust to become active.
9) Making it official with a bank account
Finally, a trust bank account needs to be opened for the trust fund. This must be opened in the name of the trustee. The first deposit in the account will be the settlement amount and must be made before any other transactions are undertaken.
Should you have a family trust? The big question answered.
While the family trust tax and asset protection benefits are obvious, it’s a structure that needs to be adequately understood before you enter into one.
To decide if you should create a trust for your family business, ask yourself the following questions:
- Am I expecting more people to join my business?
- Am I expecting anyone to exit the business?
- Do I intend to sell my business for a significant capital gain, or do I want to issue shares to existing employees?
- Do my family or I plan to take advantage of government grants or tax concessions?
- Am I prepared to keep strict financial records?
In our opinion, you should put money in a trust if you need a tax-effective plan to protect your family and business assets. But should you choose to set up a family trust, it’s crucial to consider your long-term financial and tax planning objectives, as well as any legal responsibilities involved.
[free_strategy_session]
Book a free strategy session to plan your family trust
Setting up a family trust is a significant decision, and getting it right from the start is essential. Our 90-minute strategy session provides a personalised plan tailored to your financial goals.
- Gain clarity on whether a family trust suits your needs
- Understand the tax minimisation benefits of this structure
- Understand your next steps to set up and manage your trust effectively
[/free_strategy_session]
Need help setting up a family trust?
Our accountants help families across Australia set up family trusts. However, if you'd like an in-person meeting, we have offices in Gold Coast, Donald, Malvern, Melbourne and Port Macquarie.
If you’re looking for a structure that provides for effective tax planning and improved protection for your family and business assets, then a family trust might be for you.
Book a chat with our business accountants today, and let’s get started on your trust.
